Attractive valuations and more positive fundamentals can be found in some consumer goods companies, the Macau gaming sector, car rental companies and even some commodity companies, Pheona Tsang, head of fixed income, told Fund Selector Asia.
“Last year we avoided a lot of sectors, even though some of the prices were really low. There are more opportunities in 2016," she said.
“The mainland property sector performed the best in 2015. One cannot expect a lot of capital gains this year, but it is more of a defensive and yield-carry act.”
For its soon-to-be-launched BEA Union Investment China High Yield Income Fund, more than half of the fund's 50 holdings are expected to allocate to the Chinese property sector.
The overall yield is expected to reach above 7%, and instruments will have an average credit rating of BB-.
The new fund is expected to have a flexible investment strategy, similar to the firm's BEA Union Investment Asian Bond and Currency Fund. Turnover in that fund was high at four times per year.
Investment grade risk
Tsang noted that China's investment grade products are a risk. These bonds have been downgraded in the aftermath of some corporate bond defaults.
“Some companies receive an investment grade rating, despite their weak business, due to support by the state government. One has be cautious of these companies that have overcapacity. They have a high chance of being downgraded to high yield,” she said.
Earlier this month, state-owned China Railway Materials halted trading for its RMB16.8bn ($2.6bn) of debts, citing difficulties on repayments due to a tough business environment.
Bonds to avoid
Chinese authorities have proposed a debt-for-equity swap plan that allows banks to turn soured debts into equities, in order to lower the non-performing loan ratio.
But the new BEA fund doesn’t hold any China banking sector bonds, Tsang noted, as the debt-for-equity swap suggests higher risk.
Neither does it invest in any yuan-denominated bonds as they have a lower yield of roughly 4-5%, compared to an average 6-7% of USD bonds issued by Chinese companies.
The new fund is operated under a joint venture between the Bank of East Asia and Frankfurt-based Union Asset Management Holding. The joint venture had $6.5bn of assets under management as of the end of last year.
Performance of the BEA Union Investment Asian Bond and Currency Fund was ranked the top among Asia Pacific fixed income funds in Hong Kong for the past five years, according to FE.